Room for growth in Dubai's affordable sector

Affordability is not a word synonymous with Dubai but a burgeoning young and middle-income population is putting pressure on the government to reinvent the city’s residential real estate model for the next generation.

And investors are starting to take notice.

Dubai’s population is set to hit five million by 2030, but house prices remain unaffordable for many of the lower and middle income families on whom the city’s future economic success depends.

“The government recognizes the need to re-position Dubai for broader appeal,” said Craig Plumb, Head of Research, JLL MENA. “It needs middle income workers in its hospitals and schools but, at the moment, those families find it difficult because of such high rents and sale prices are beyond the reach of many.

“As other cities in the region become more competitive, this shortfall could potentially damage Dubai’s economy,” he added.

Budget-conscious buyers
Some developers have spotted the commercial opportunity in building more affordable housing; several projects have sprung up across Dubai in areas such as Jumeirah Village Circle, Dubai South, Al Furjan, IMPZ, International City, Dubai Sports City, Studio City, and Dubailand.

Budget-conscious buyers have snapped up competitively priced apartments and have taken advantage of the increasingly attractive payment plans for off plan units being offered by developers.

According to research from the Affordable Housing Institute, almost 82 percent of sales in 2017 were for below AED 2 million, with almost half falling below AED 1 million. Of the transactions, 85 percent were for apartments.

While this buoyancy bucks the wider residential market, which has seen sales and rental prices decline by some 15 to 20 percent since the market high in 2014, the present supply of affordable homes is still failing to match the current need.

In 2017, just 20 percent of newly completed residential real estate was affordable, by JLL’s definition.

That is, AED 800,000 sale price, and AED 74,000 average annual rental for a 2 bedroom apartment. In contrast , JLL estimates that this is the top price point that can be afforded by 40 percent of families in the city.

“It’s better than it used to be but there’s still not enough affordable product priced where the majority of people can purchase or rent,” says Plumb.

Move towards build-to-rent
Given the transient nature of the population (with most jobs only entitling expatriates to remain in the Emirate for two or three years at a time), there will always be a major rental market in Dubai, Plumb says Dubai should move more towards a ‘build-to-rent’ model that mirrors the multifamily sector in the U.S. or the UK’s Private Rented Sector.

Doing so would open up opportunities to institutional investors, for whom a lack of investment grade stock remains a significant barrier.

“Although most of Dubai’s property transactions involve overseas investors, it’s largely on a private basis,” said Plumb. “The market needs to adjust to create institutional quality product, which would appeal to overseas interest.”

Half measures?
For now, affordable housing is likely to remain a minority segment until the government steps in to incentivise developers to support lower margin projects, says Plumb.

“The Dubai government doesn’t provide social housing for expatriates, it’s left to the private market. They want developers to build cheaper housing but many have preferred to focus on more luxury products that have been generating higher margins. More needs to be done to encourage developers to adjust their strategy and provide more affordable product.”

Legislation is, of course, an available option and measures being floated include quotas to ensure that a certain percentage of units in any development are affordable, and more relaxed planning regulations.

Plumb says Dubai could also consider following Hong Kong and Singapore’s lead to raise the minimum plot ratio to increase densities and developer margins from higher density plots around the cities expanding metro network.

“While there is now a greater recognition of the need, the market is still failing to provide enough housing at the levels that can be afforded by lower income workers in Dubai. Until this is rectified, Dubai is likely to see the continued daily migration of workers into the city from lower cost residential locations in Sharjah and the Norther Emirates.”

Editor's Note: This article was originally published in The Investor on Wednesday June 13th, 2018 http://bit.ly/TheInvestor